RBI deputy guv Rao bats for need to periodically raise deposit insurance

An alternative targeted insurance approach with full coverage for certain sections of customers like small depositors and senior citizens can be explored

A periodic upward revision in the uniform deposit insurance coverage of Rs 5 lakh is necessary as India's growth and formalisation are likely to lead to a significant rise in primary and secondary deposits, which might create a gap between the ideal insurance reserve requirement and the available reserves, Deputy Governor, Reserve Bank of India, M Rajeshwar Rao said on Monday.

Currently, there is a uniform deposit insurance coverage of Rs 5 lakh per depositor of each insured bank in India.

“Considering multiple factors like growth in the value of bank deposits, economic growth rate, inflation, and increase in income levels, a periodical upward revision of this limit may be warranted. This means that the deposit insurer has to be mindful of the additional funding and needs to work out suitable options to meet the same,” said Rao while speaking at the International Association of Deposit Insurers (IADI) Asia-Pacific Regional Committee International Conference.

Rao also highlighted that having full insurance cover for deposits appears to be ideal for depositors and also helps to avoid bank runs.

“However, this is likely to be a suboptimal solution given the associated moral hazards and financial non-viability,” he said, adding that the economic viability of an alternative targeted insurance approach with full coverage for certain sections of the customers like small depositors, senior citizens or pool deposits of smaller depositors based on a careful evaluation of the constructs, costs and benefit of such an approach can be examined.

According to an IADI survey, the median deposit insurer covers 43.1 per cent of the value of eligible deposits in India. Additionally, the number of fully protected accounts constitutes 97.8 per cent as of March 31, 2024, of the total number of accounts in the banking system against the international benchmark of 80 per cent. While the scope and coverage appear satisfactory at this juncture, there are likely challenges going forward, Rao said.

He further highlighted that the role of Deposit Insurance and Credit Guarantee Corporation (DICGC) in supporting consolidation in the urban cooperative banks (UCBs) sector is a matter that requires greater focus under least-cost resolution principles, given its importance in driving financial inclusion and credit delivery to those with limited means.

He emphasised that there was a need to consider whether coverage of digital deposit-like products should also be an option for the deposit insurer. Recently, a committee formed by the RBI for review of customer service standards in its regulated entities recommended extending deposit insurance cover to money kept in the wallets of prepaid card issuers. “While there is clearly no ‘one-size-fits-all’ solution to cover digital products, we need to choose a suitable approach that is consistent with the primary objective of the deposit insurance function,” he said.

Meanwhile, Rao suggested that as banks introduce more innovative products and new risks potentially impact deposit growth, a risk-based premium would be a more effective option for the deposit insurer to ensure the robustness of its finances and enhance its ability to adapt to changing financial conditions.

Currently, in India, as is the case globally with 96 per cent of deposit insurance systems, an ex-ante funding system, wherein a deposit insurer maintains a deposit insurance fund, primarily financed by premiums collected from the insured institutions, and the fund is used to pay the depositors in the event of a bank failure.